Gold bulls charge ahead after Fed meeting

In the Lead: “Promissory Notes”

Momentum players pulled the “buy” trigger on precious and base metals, along with crude oil and equities, yesterday afternoon, after they concluded that the Fed’s offer to not hike interest rates until late 2014 was tantamount to a fresh QE program. Lost in the euphoric buying spree (and again we draw your attention to the fact that this was a new display of the “buy everything” syndrome which is anything but healthy for one or another asset in the long-run) was the other side of the Fed announcement.

We are referring to the specificity of the Fed’s overt inflation and interest rate targets. The US central bank made it clear (for the first time really) that it is targeting the former at 2% and the latter at 4%-5%. Neither figure is set at a level that would warrant runaway prices in inflation hedges or interest-sensitive assets. In fact, the interpretation that the Fed has hereby assured investors of destructive-level inflation to come could not be more incorrect. However, the knee-jerk reaction that if the Fed so much as appears dovish then we run out and buy everything stamped with the ‘asset’ label was more than obvious as the afternoon unfolded.

Spot prices opened with follow-through momentum buyers still in charge on the floor in New York this morning. Gold traded from $10 to $18 higher, in a range of from $1,720 to $1,730 but still beneath the 78.6% Fibonacci retracement level of $1,744 per ounce. Analysts at Standard Bank (SA) pointed out in their morning report that “overnight in Asia, we saw some profit-taking emerge which kept precious metals from rallying further—remaining steady for most of the session. While physical demand for gold is largely absent in the Far East (due to New Year celebrations), current prices have scared away any potential interest from Indian buyers. For the first time since mid-November 2011, Standard Bank’s Physical Gold Flow Index (available on SBHF) has dipped into negative territory, indicative of net selling.”

Dovetailing with the above, The Street.com’s Alix Steel reports that “the one downside to a [further] big rally in the gold price is if Indian demand slows further. According to GFMS, the first half of 2011 saw very strong buying from India as consumers rightly anticipated higher prices in the future and loaded up on "cheaper" gold. As gold soared in the back half of the year, demand slowed to a crawl. The World Gold Council said that jewelry demand tanked 28% in the third quarter. From July to December gold prices in rupee terms were up 25% as the dollar appreciated against the local currency and as inflation ballooned to 10% making gold too expensive to buy.”

Silver gained 36 cents and orbited near the mid-$33 per ounce area. Fresh gains above $33.66 could meet resistance near the $35.70 level if they were to materialize. Platinum added $35 (2.2%) and was the best performer in the complex this morning. Aside from the present from the Fed, the market appeared to be benefiting from the news that the labor action at Impala Platinum will result in higher-than-anticipated production losses in the noble metal.

Palladium rose $5 to the $702 mark on the offer side of spot. In the background, the US dollar was off by 0.43% at the 79.14 level and could encounter support near 78.30 if selling pressure persists. Crude oil advanced $1.75 and its gains too, showed that fundamentals are second-tier in importance when Fed-induced euphoria rules the trading day. The Dow gained 71 points and took its cues not only from the greenback’s seven-week lows but also from the 0.4% rise in US leading economic indicators and from the 1% gain in European markets earlier in the day (those also largely courtesy of the Fed announcement)